Burundi
Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Modification of Performance Criteria: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Burundi

This paper discusses key findings of the Second Review for Burundi under the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). All quantitative and structural performance criteria for March 2009 were met, and structural reforms are on track. In the near term, the authorities are determined to focus on sustaining macroeconomic stability, increasing domestic resource mobilization, promoting pro-poor growth, and implementing the power-sharing agreement to consolidate the peace process. Their commitment to the PRGF-supported program is unwavering and their end-March 2009 program performance has been impressive.

Abstract

This paper discusses key findings of the Second Review for Burundi under the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). All quantitative and structural performance criteria for March 2009 were met, and structural reforms are on track. In the near term, the authorities are determined to focus on sustaining macroeconomic stability, increasing domestic resource mobilization, promoting pro-poor growth, and implementing the power-sharing agreement to consolidate the peace process. Their commitment to the PRGF-supported program is unwavering and their end-March 2009 program performance has been impressive.

I. Background

1. Burundi is one of the least developed countries in the world. GDP per capita is about US$140, and about 67 percent of the population lives below the poverty line. While the country is making some progress toward the Millennium Development Goals (MDGs), it is unlikely that any will be achieved by 2015 (Table 1).

Table 1.

Burundi: Millennium Development Goals

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Sources: World Bank; World Development Indicators database, April 2006; and IMF staff estimates.

Survey data for 1998.

Survey data for 1992.

Survey data for 2000.

Targets 12-15 and indicators 33-44 are excluded because they cannot be measured on a country-specific basis. These are related to official development assistance, market access, and the HIPC Initiative.

2. The country is emerging from more than a decade of civil conflict. In December 2008, a power-sharing agreement was signed with the last rebel group, Forces Nationales pour la Libération (FNL). FNL is now recognized as a political party, and the rebels are being reintegrated into national institutions. However, security remains fragile ahead of the general elections scheduled for mid-2010.

3. The World Bank in August 2008 approved a new country assistance strategy that focuses on structural reforms to further increase growth and reduce poverty. The main priorities are to: (i) promote sustainable and broad-based economic growth; and (ii) improve access to social services and consolidate social stability. The World Bank-IMF Work Program is described in the Informational Annex.

II. Recent Developments and Performance Under the PRGF

4. Economic growth accelerated and inflation increased in 2008 (Figure 1 and Table 2). Real GDP growth increased to 4½ percent, up from 3.6 percent in 2007, mainly because of a good coffee harvest and more donor-financed investment projects. With international commodity prices higher in the first half of the year, 12-month inflation peaked at about 30 percent in June 2008 before declining to 26 percent by year-end, far above the 14 percent target. In 2008 the nominal exchange rate depreciated by 10 percent, but the real effective exchange rate appreciated by 16 percent.1

Figure 1.
Figure 1.

Recent Macroeconomic Performance, 2000-08

Citation: IMF Staff Country Reports 2009, 242; 10.5089/9781451803020.002.A001

Table 2

Burundi: Selected Economic and Financial Indicators, 2007–12

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Sources: Burundi authorities; and IMF staff estimates and projections.

5. Performance under the PRGF-supported program was generally satisfactory in 2008 (MEFP, Table I.1). The central bank met the end-year indicative targets on net foreign assets and net domestic assets comfortably The indicative target on net domestic financing of the government was missed by about 0.4 percent of GDP because of higher domestically financed spending than was programmed.

6. All quantitative and structural performance criteria for March 2009 were observed, and structural reforms are on track. With regard to fiscal reforms, the value-added tax (VAT) law was promulgated, payroll management was transferred to the Ministry of Finance (performance criterion), the census of government employees was completed, and adoption of the PFM strategy laid the groundwork for PFM reform. Monetary and financial sector reforms have also progressed well (MEFP, ¶9-10).

III. Consolidating Economic Stability and Sustaining Growth

7. The discussions focused on appropriate policy responses to the global financial crisis, with a view to consolidating economic stability and further reducing poverty. Fiscal and monetary policies will be prudent, and the exchange rate regime will remain flexible. In particular, fiscal policy will be eased to accommodate the temporary revenue shortfall caused by the global crisis. Given the confluence of a more favorable inflation outlook and weaker growth for 2009, monetary policy will also be eased slightly to help the economy adjust to the shocks from the global financial crisis while still seeking to reduce inflation to single digits.

A. Macroeconomic Outlook

8. Though Burundi’s macroeconomic prospects for 2009 remain positive, they are less so than they were because of the global financial crisis. Economic growth is projected to moderate to 3.2 percent in 2009, from 4½ percent in 2008, mainly because of (i) reduced demand for exports; (ii) a decline in world coffee prices; and (iii) lower private transfers and foreign direct investment. However, weak economic growth and lower international oil and food prices have improved the inflation outlook for 2009. Between December 31, 2008, and April 30, 2009, 12-month inflation fell from 26 percent to 13 percent;2 by year-end it is expected to decline further to 9 percent.

9. Provided the security situation continues to improve, Burundi’s medium-term economic outlook appears to be positive (Text Table 1). GDP growth is expected to average about 4 percent over 2009-12, driven by three main factors: (1) continued removal of major economic distortions, especially in the coffee sector, which will boost total factor productivity; (2) a substantial increase in aid-financed investment, largely for infrastructure renovation, which will help relieve major supply bottlenecks; and (3) the impact of accession to the East African Community (EAC), which will help diversify the economy, stimulate competition, and attract more investment.

Text Table 1.

Burundi: Medium-Term Outlook, 2008–12

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Sources: Burundi authorities; and IMF staff estimates and projections.

B. Fiscal Policy and Related Reforms

10. The revised program targets an overall fiscal deficit (on a cash basis, and including non-HIPC grants) of 4.3 percent of GDP, compared with the 3 percent envisaged previously, because of the temporary revenue loss caused by the global financial crisis. Total spending would increase by 1½ percent of GDP, reflecting grants-financed outlays to mitigate the impact of the crisis on the poor. The mission supported the authorities’ decision to finance the temporary increase in the fiscal deficit by (i) delaying repayment of past central bank advances (0.6 percent of GDP) and (ii) accessing limited and temporary central bank financing (0.7 percent of GDP). The envisaged increase in central bank financing is consistent with both macroeconomic stability and the new central bank charter.3

11. Fiscal policy is also geared to addressing debt sustainability concerns. Given Burundi’s debt burden, external financing of the budget should be strictly limited to grants and highly concessional loans. Planned fiscal reforms over 2009-11 will also help ensure debt sustainability. These include the new budget law and the reforms of tax policy, revenue administration, expenditure policy, treasury management, and debt management (IMF Country Report No. 08/282 and IMF Country Report No. 09/93).

12. Fiscal policy will continue to support the use of aid. If concessional external financing is higher than expected, the program will accommodate a higher fiscal deficit by allowing increased spending in areas critical to meeting the MDGs. The authorities are continuing to work with the World Bank to improve Burundi’s absorptive capacity.

13. The authorities recognize that mobilizing domestic revenue is critical for medium-term fiscal sustainability and increased poverty-reducing expenditure. The revised revenue target for 2009 is 18 percent of GDP, still above the average of 17.3 percent of GDP for fragile states. In view of the negative impact of the global financial crisis on revenue, staff urged the authorities to continue their efforts to broaden the revenue base by reducing exemptions and strengthening tax and customs administration. Moreover, with Burundi’s accession to the EAC, the authorities will introduce in July 2009 a VAT to replace a transaction tax and the EAC common external tariff.

14. The authorities are committed to reallocating spending to MDG-related sectors, supported by debt relief from the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) (MEFP, ¶14, 16). Spending on priority sectors is expected to increase from 8.8 percent of GDP in 2008 to 9.9 percent of GDP in 2009. In line with Burundi’s poverty reduction strategy, MDRI resources will be spent on agriculture, water, rural infrastructure, health, and education.

15. The revised program takes into account a higher payroll in the health sector. Because of new allowances granted to frontline health workers, the wage bill will be revised upward by about 0.5 percent of GDP, which will be offset by cuts in nonpriority spending. The government stressed that the new allowances were needed to stem a persistent outflow of doctors and nurses from the public health system and preserve recent gains in health indicators.

16. Staff urged the authorities to continue to reform wages and employment. The authorities reiterated their commitment to pursue planned civil service reforms (MEFP, ¶16), in consultation with the World Bank. Now that payroll management has been transferred to the Ministry of Finance, the government will audit the payroll to ensure that wage and allowance payments comply with the law. The audit will also provide a sound basis for the reform of wage policy the government is undertaking in consultation with the World Bank.

17. The authorities are committed to reforming PFM (MEFP, ¶22). The council of ministers adopted a PFM strategy and action plan, and the government has stepped up rationalization of its bank accounts. This year it has also begun phasing in the new budget organic law.

C. Monetary Policy

18. Monetary policy will continue to be geared to stabilizing prices while allowing sufficient scope for economic growth. It will also be eased slightly to help the economy adjust to the crisis, though without jeopardizing the inflation objective. To secure the single-digit inflation objective, broad money will continue to rise more slowly than nominal GDP. Staff expects that in 2009 reserve money will grow by about 13½ percent and broad money by about 14½ percent. Growth in credit to the private sector is expected to moderate because of the economic slowdown.

19. The Ministry of Finance and the central bank agreed that close coordination of fiscal and monetary policies is essential to achieving the inflation target (MEFP, ¶19). They recognize that cooperation is needed to improve central bank liquidity forecasts and ensure that aid-financed expenditures are absorbed through sales of foreign exchange.

20. Consequent to the global financial crisis, the central bank is enhancing banking supervision (MEFP, ¶23). Although the recent Bank-Fund FSAP mission detected no obvious sign of imminent systemic stress, staff urged the authorities to remain vigilant by moving quickly to implement MCM recommendations on banking supervision, particularly those related to risk-based supervision.

D. External Sector Policies

21. External developments in 2009 are expected to be dominated by the global financial crisis. Despite a fall in coffee prices and private transfers, the external current account deficit is expected to improve, mainly because of the projected decline in international food and oil prices (food and oil imports comprise one-fourth of total imports).4 Donors are expected to meet their commitments for 2009. Because of lower private sector financing and foreign direct investment, it is expected that the capital and financial account will worsen, the overall balance of payments will register a small deficit, and thus gross official reserves will decline slightly, to about 5½ months of imports.

22. Staff stressed that improved foreign exchange markets will help the economy adjust to exogenous shocks (MEFP, ¶20). Building on recent progress in launching symmetrical foreign exchange auctions, the authorities will reinforce the auction system while preparing the groundwork for an interbank foreign exchange market in the medium term. Staff urged them to also take steps to eliminate the remaining multiple currency practice and accept the obligations of Article VIII, Section 2, 3, and 4. They intend to request Fund TA for this.

23. The authorities should continue to firm up management of external debt now that Burundi has reached the HIPC completion point and received MDRI relief. According to the latest low-income country debt sustainability analysis (IMF Country Report No. 09/84), Burundi faces a high risk of debt distress—making it even more important to continue seeking only grants and highly concessional loans.

24. The government has established an interministerial committee to coordinate EAC integration and facilitate decision-making. A national strategy and action plan, prepared with the assistance of development partners, will be adopted soon.

E. Structural Reforms

25. In addition to the structural reforms discussed (above and MEFP ¶20, 22-24), the government is making steady progress on reforming the coffee and oil sectors. Since adopting a comprehensive reform plan for the coffee sector, the authorities have established a regulatory authority and published bidding invitations for the sale of coffee washing stations.

26. The authorities are committed to using a price adjustment mechanism for petroleum products (MEFP, ¶11, 26). The government issued a decree in May 2009 setting out the terms for monthly adjustment of retail prices for petroleum products on the basis of World Bank and Fund TA.

F. Program Monitoring

27. Semiannual quantitative performance criteria focus on net foreign assets and net domestic assets of the central bank and net domestic financing of the government, with adjusters to deal with aid volatility. There are also three continuous performance criteria: zero ceilings for (i) new nonconcessional external debt contracted or guaranteed; (ii) short-term external debt; and (iii) accumulation of external arrears. Indicative targets have been established for domestic arrears accumulation and reserve money (MEFP, Table I.2). The authorities are requesting (i) modification of quantitative performance criteria for end-September to take into account the impact of the global financial crisis; and (ii) the conversion of all structural performance criteria into structural benchmarks, in line with the recent Board decision on conditionality policy. As foreshadowed in IMF Country Report No. 08/282 (¶51), staff proposes to remove the indicative target on the wage bill because the authorities have fulfilled the structural conditionality on the civil service census and payroll management.

28. The proposed structural conditionality (see MEFP, Table I.3) is linked to the first strategic axis of the Poverty Reduction Strategy Paper, strengthening economic governance, especially bringing transparency to financial management.

G. Risks

29. Although the authorities have reiterated their firm commitment to the program and to good governance, there are two main risks:

  • First, a worsening political and social situation ahead of next year’s general elections would be a major setback. Continued implementation of the recent power-sharing agreement between the government and the last rebel group could help contain this risk.

  • Second, the global financial crisis on economic growth could have more impact than expected. Should this risk materialize, the authorities have a contingency plan to cut nonpriority spending if tax revenue is lower (MEFP, ¶17). The global crisis could also lead donors to scale back their support. To deal with that possibility, the program includes target adjusters (see the Technical Memorandum of Understanding (TMU)).

IV. Staff Appraisal

30. In a difficult postconflict environment, Burundi has made steady, though uneven, progress. Real GDP accelerated in 2008, though the food and fuel shock has kept inflation high. Most monetary and fiscal reforms have progressed well. The economic outlook is generally positive but subject to risks arising from the security situation and the external environment.

31. The revised program for 2009 should further consolidate macroeconomic stability and reduce poverty while helping Burundi cope with the impact of the global financial crisis. Staff agrees that easing fiscal and monetary policy in the near term is an appropriate policy response to the crisis. Spending on MDG-related sectors will be boosted significantly, supported by HIPC and MDRI debt relief.

32. The authorities should continue to rely mainly on grants and highly concessional loans to avoid unsustainable debt. Improvements in governance will be critical for donor support. To this end, the authorities should further strengthen PFM. Staff urges donors to accelerate their grant and other concessional support given the need to reduce poverty and mitigate the risk of debt distress.

33. In light of the global financial crisis, staff urges the authorities to accelerate their efforts to strengthen the financial sector by improving banking supervision, addressing weaknesses in the banking system, and enhancing central bank internal controls. The forthcoming Bank-Fund FSAP report should help guide these efforts.

34. Sustained growth depends on accelerating structural reforms. Besides sustaining the momentum on fiscal governance reforms, the authorities should continue their efforts to reform the coffee sector. EAC membership should also spur structural reforms that would improve the business environment.

35. As a postconflict country, Burundi still faces significant risks, but so far the authorities have demonstrated their ability to manage economic and social pressures. Staff fully endorses their efforts.

36. Staff recommends completion of the second PRGF review, based on Burundi’s performance and the strength of the program, and modification of performance criteria.

Table 3.

Burundi: General Government Operations, 2007–12

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Sources: Burundi authorities, and IMF staff estimates and projections.

The medium-term current spending projections are mostly driven by health, education, food security, and agriculture expenditures.

These are externally financed expenditures, and include spending on elections, demobilization, and one-off temporary social safety net programs.

Expected to be financed by additional donor support.

Table 4.

Burundi: Monetary Survey, 2005–09

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Sources: Banque de la République du Burundi (BRB); and IMF staff estimates and projections.
Table 5.

Burundi: Central Bank Accounts, 2006–09

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Sources: Banque de la République du Burundi (BRB); and IMF staff estimates and projections.
Table 6.

Burundi: Balance of Payments, 2007–12

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Sources: Burundi authorities; and IMF staff estimates and projections.
Table 7.

Burundi: Banking System Soundness Indicators, 2005–09

(in percent, unless otherwise indicated)

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Sources: Burundian authorities; and IMF estimates.

The decrease is due to the revision of Article 2 in Directive No. 2/06 of November 24, 2006. It is related to the calculation of basic equity capital, which no longer includes general provisions for risks.

Table 8.

Burundi: Actual and Projected Schedule of PRGF Disbursements and Reviews, 2008–11

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Appendix I: Translated from French

Burundi: Letter of Intent

Bujumbura, June 26, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C., 20431

Dear Mr. Strauss Kahn:

1. The Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for the Republic of Burundi on July 7, 2008. This arrangement supports the medium-term program (April 1, 2008 to March 31, 2011) aimed at continuing the process of macroeconomic stabilization, reducing poverty, promoting structural reforms, and improving governance. In accordance with the terms of this arrangement, the government of Burundi carried out the second review of the program together with a mission from the IMF. This review focused on implementation of the program between October 1, 2008, and March 31, 2009, as well as the outlook and economic and financial measures to be implemented in 2009.

2. On the political front, the government of Burundi continues to make every effort to consolidate the peace process by implementing the agreements signed between Burundi and the warring parties. Moreover, the government is taking the necessary steps to organize the elections in 2010.

3. On the economic and social front, the government of Burundi is pleased to report that implementation of the program has been satisfactory, despite the difficult international situation resulting from the global financial crisis. In particular, all the quantitative and structural performance criteria for end-March 2009 have been met.

4. The government is resolved to continue implementing the policies and measures described in the Poverty Reduction Strategy Paper (PRSP). The Memorandum on Economic and Financial Policies (MEFP) attached to this letter completes the memorandums dated June 24, 2008, and January 8, 2009.

5. The government believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program. It will take any further measures that may become appropriate for this purpose. The Burundi authorities will consult with the IMF on the adoption of such measures and in advance of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultations.

6. The government of Burundi will provide the IMF with such information as it may request to monitor progress made in economic and financial policy implementation. Burundi will also carry out reviews of the PRGF-supported program with the IMF every six months. The third review should be completed no later than January 2010 and the fourth review no later than July 2010.

7. In view of the considerable progress made in implementing the program supported by the PRGF, the government is requesting completion of the second review and the third PRGF disbursement of SDR 6.6 million. The government is also requesting (1) modification of the performance criteria for end-September to take into account the impact of the global financial crisis; and (2) conversion of all structural performance criteria into benchmarks.

8. As in the past, the Burundi authorities wish to make this letter available to the public, along with the attached MEFP and Technical Memorandum of Understanding (TMU), as well as the IMF staff reports on the second PRGF review. We therefore authorize their publication and posting on the IMF website, subject to Executive Board approval. These documents will also be posted on the official websites of the Burundi government.

Sincerely yours,

_/s/_

Clotilde NIZIGAMA

Minister of Finance

_/s/_

Gaspard SINDAYIGAYA

Governor, Bank of the Republic of Burundi

_/s/_

Gabriel NTISEZERANA

Second Vice President, Republic of Burundi

Attachments:

Memorandum on Economic and Financial Policies Technical Memorandum of Understanding

Appendix I: Attachment I: Translated from French

Burundi: Memorandum on Economic and Financial Policies

I. Introduction

1. This Memorandum on Economic and Financial Policies (MEFP) completes the memorandums dated June 24, 2008, and January 8, 2009. It provides an update on program implementation and the medium-term outlook and economic and financial policies that will be implemented in 2009 within the framework of the program covering April 1, 2008, to March 31, 2011. The measures and objectives contained in this MEFP are compatible with the Poverty Reduction Strategy Paper (PRSP) published in September 2006 and the findings of the annual PRSP implementation report sent to the IMF and the World Bank in November 2008.

2. Economic policy will continue to be guided by the following objectives: (1) return to single-digit inflation; (2) improve the composition of public spending to the benefit of priority sectors while preserving fiscal sustainability; (3) strengthen public financial management (PFM) and good governance; and (4) strengthen the internal control systems of the central bank.

3. With the continued improvement in the security situation, the macroeconomic objectives are as follows for the period of the PRGF: (1) GDP growth should average 4 percent over the medium term, compared to the 2004-07 average of 3.6 percent; (2) inflation should slow to about 6 percent in 2011; and (3) gross official reserves should stabilize at coverage of four months of imports.

II. Program Implementation

4. Macroeconomic developments have been generally in line with the program, although inflation was higher than anticipated. In 2008, real GDP growth accelerated to 4.5 percent, owing to a good coffee harvest. Inflation stood at 25.7 percent, compared to the targeted 14 percent, as a result of the increase in world food and oil prices. The overall fiscal deficit (cash basis, including non-HIPC grants) is estimated at about 4.6 percent of GDP, slightly below the target of 4.9 percent. Burundi’s external position improved significantly, as reflected in the larger-than-anticipated increase in international reserves.

5. All the quantitative performance criteria for end-March 2009 have largely been met. The ceilings on the wage bill and reserve money were met. However, the target for cumulative domestic arrears was not met because of the delay in disbursements of budgetary assistance.

6. In close collaboration with development partners, the government is strongly pursuing structural reform, particularly the promotion of transparency and good fiscal management, financial sector reform, coffee sector reform, oil sector reform, and regional integration. In addition to the achievements described in the previous memorandum dated January 8, 2009, significant progress has been made since then in all these areas.

7. In the area of public financial management (PFM), the government adopted the PFM strategy and action plan in the Council of Ministers, which will give new impetus to fiscal reform. The rationalization of government accounts is continuing without interfering with the smooth operation of the units concerned. To modernize the tax system, Parliament also adopted a law on the value-added tax (VAT), which will come into effect on July 1, 2009, in accordance with the commitments taken in the context of the East African Community (EAC). To better control the wage bill, the Ministry of Finance took over payroll management (end-March 2009 performance criterion). Moreover, the government also completed the census of civilian, military, and police employees. The report reveals that the status of 1,801 employees remains to be validated. Any ghost workers will be eliminated from the payroll once the validation is completed.

8. In the financial sector, the central bank continues to implement important measures to strengthen its internal control and risk management system, in line with the recommendations made in the recent safeguards assessment report prepared by IMF staff. In this context, an international auditor conducted special audits of the controls on large domestic transfers and disbursements to the government or its creditors in 2008.

9. In the monetary sector, the system of required reserves has been aligned with best practices, while the system of liquidity auctions was reformed with the removal of the ceiling on interest rates. In the area of foreign exchange, the Directives for Foreign Exchange Reserve Management were adopted and the Reserve Management Committee was reactivated. The central bank took measures to correct the dysfunctions in the foreign exchange auction market (MED), specifically by eliminating the floor price and the prior announcement of the amount to be auctioned. Moreover, it launched a symmetrical MED to make it possible to organize foreign exchange purchase auctions as well.

10. In the area of banking supervision, the decision to increase the minimum capital requirements for banks in 2009 was published. The central bank’s (BRB) self-evaluation on compliance of its supervision with the Basel principles was completed, and an action plan for the implementation of corrective measures was prepared. In addition, reorganization of the banking supervision unit is proceeding well.

11. An important step was taken in the reform of the coffee sector with the decree creating and setting out the bylaws of the Burundi Coffee Sector Regulatory Authority. Invitations to bid for the sale of coffee washing stations were published on June 5, 2009. As part of the oil sector reform, the government adopted a decree in May 2009 setting out the terms for monthly adjustment of retail prices for petroleum products on the basis of a World Bank study discussed with all participants in the sector. The government also benefited from technical assistance from the IMF’s Fiscal Affairs Department on the use of fiscal and public spending policies to better protect the poor from the impact of such a price adjustment mechanism.

III. Economic Prospects and Policies for 2009

12. The international financial crisis will have a negative impact on the economy of Burundi in 2009. GDP growth should slow and fall from 4.5 percent in 2008 to about 3.2 percent owing to (1) reduced demand for exports; (2) the decline in coffee prices; and (3) the likely fall in remittances and foreign direct investment. Inflation at end-2009 should decline to 9 percent owing to the drop in commodity prices, and gross official reserves should decline to about 5.5 months of imports.

A. Fiscal Policy

13. Despite the international financial crisis and its impact on government finances, the government will implement all of the fiscal and public spending policies defined in the MEFP of January 8, 2009. The key objective of the 2009 spending policy remains to significantly improve the composition of public spending in favor of priority sectors in order to accelerate progress toward the Millennium Development Goals.

14. The international financial crisis will certainly impact government finances. It could result in a reduction in government revenues of about 1½ percentage points of GDP. To offset the impact of this crisis on the poor, emergency spending on targeted social safety nets (approximately 1.5 percent of GDP) could be implemented if additional budgetary assistance is obtained. Such spending will be used to finance food security and school feeding programs and for targeted assistance for the most vulnerable segments of the population and farmers.

15. The ratio of the government wage bill to GDP will decline less than anticipated in the medium term owing to higher payroll in the priority sectors, which are key for achieving progress toward the Millennium Development Goals. The ratio should remain below 11 percent of GDP toward the end of the program in 2011.

16. To contain the wage bill, the government will continue to draw on the findings of the Public Expenditure Management and Financial Accountability Review (PEMFAR) prepared jointly by the World Bank and the government of Burundi. In particular, with the census of civil servants having been completed and payroll management transferred to the Ministry of Finance, the government will proceed with the audit of the payroll to ensure that the calculated wages are indeed on a sound legal basis and that there are no abuses. This audit should precede the exercise to harmonize wages. To increase spending in the priority sectors, the government will implement a rationalization plan for nonpriority spending, in accordance with the PFM strategy.

17. In support of its fiscal policy, the government will strengthen the sliding quarterly cash flow plan which was partially implemented (end-June 2009 structural benchmark). Expenditure commitment and cash flow plans will be harmonized at the beginning of each quarter and submitted to the Minister of Finance for approval. In this context, all budget spending will require the prior authorization of the Minister of Finance and will be executed strictly on the basis of revenue availability. A monthly budget allocation for each ministry should be defined, with strict expenditure prioritization. To protect priority spending, the government will identify in advance nonpriority expenditure that will be cut in the event of a decline in revenue or financing.

B. Monetary and Foreign Exchange Policy

18. The government plans to pursue a prudent monetary policy, which is necessary to limit inflationary expectations. Given the improved inflation outlook, the BRB will ease its monetary policy. However, until the objective of single-digit inflation is attained, the central bank will set broad money growth below nominal GDP growth.

19. Better fiscal and monetary policy coordination will be essential, especially to coordinate responses to the impact of the international financial crisis. The central bank and Ministry of Finance will therefore hold monthly meetings. In addition, the role of the Cash Flow Management Committee will be strengthened with the preparation of monetary and fiscal policy recommendations to the BRB and the Ministry of Finance.

20. Proactive management of the central bank’s foreign exchange reserves and sterilization of foreign exchange operations will continue within a floating exchange rate regime for the Burundi franc, with a view to achieving the inflation target. With technical assistance from the IMF, the central bank will continue to implement the recommendations of IMF experts for improving the operation of the foreign exchange market. In particular, in consultation with the commercial banks, the central bank will prepare and adopt a market convention with a code of conduct for market dealers. It will also conduct a critical annual general review of all aspects of foreign exchange reserve management.

C. Structural Reforms

21. In close collaboration with development partners, the government will continue to pursue its ongoing structural reforms: promotion of transparency and good governance, financial sector reform, regional integration, coffee sector reform, and oil sector reform.

22. The reform program for 2009 as presented in the January 8, 2009, MEFP will be continued. In the fiscal area, the government will continue its gradual implementation of the new organic budget law and the PFM strategy and action plan, with the assistance of development partners, notably the IMF, the World Bank, and the European Union. The Ministry of Finance has already issued ministerial orders for creation of the entities that will implement the action plan. Moreover, the rationalization of ministerial accounts will continue as part of the gradual move toward a single Treasury account.

23. On the financial sector, although there are no signs of systemic risk resulting from the international financial crisis, the central bank will step up banking supervision on a preventive basis. In particular, the central bank will move ahead with the planned increase in the minimum capital requirements for banks to FBu 5 billion and will take appropriate measures against banks that do not meet this requirement. Moreover, the central bank is awaiting the final recommendations of the study on the financial sector to guide its strategy and plan of action for reform of the sector.

24. With regard to regional integration, particularly with respect to the East African Community, a national strategy and action plan prepared with technical assistance from development partners will be adopted shortly.

25. With regard to the coffee sector, the process for the sale of coffee washing stations will move ahead following the creation of a regulatory authority for the coffee sector and publication of the related invitations to bid.

26. As for reform of the oil sector, the government will continue implementation of a price adjustment mechanism, in cooperation with the World Bank.

D. External Financing

27. The government will ensure that all its external obligations are settled when due. The Minister of Finance prepares monthly public debt position reports that give a detailed survey of obligations falling due. Regular publication of these reports is critical in strengthening Burundi’s debt management.

28. Burundi will seek only concessional external financing or grants. The government will not contract nonconcessional foreign debt and will ensure that all loans contracted have a grant element of at least 50 percent. To make certain that the concessionality threshold is respected, the government will ensure compliance with the provision that the Ministry of Finance has the exclusive right to negotiate and sign external loans.

E. Technical Assistance and Coordination of Development Partners

29. Burundi has vast technical assistance needs. The authorities plan to remain in close collaboration with bilateral and multilateral partners to build up the administrative capacity of the country’s institutions. Technical assistance from development partners remains key in the areas of tax policy and administration, public expenditure management, monetary and foreign exchange policy, banking supervision, and economic statistics.

30. It is essential to coordinate relations with development partners, considering that they finance a major portion of budget expenditure. The government has stepped up its efforts to set up an institutional framework for coordination of assistance, namely the National Assistance Coordination Committee (CNCA). This initiative is supported financially by development partners. The CNCA can help:

  • Organize the work between the government and development partners at the sectoral level, relying on the lead donor among the development partners for each sector. A high priority should be the creation of sectoral groups, as described in the CNCA organization chart.

  • Centralize coordination of assistance within a single agency, which would facilitate coordination and decision-making by the government.

  • Monitor aid disbursement and project implementation, in close collaboration with the Minister of Finance, to ensure that all financial assistance from development partners is included in the budget.

F. Program Monitoring

31. Program implementation will continue to be monitored on the basis of half-yearly reviews of the performance criteria, indicative targets, and structural benchmarks, as shown in Tables I.2 and I.3. The information to be reported to the IMF and the definition of the pertinent variables can be found in the attached Technical Memorandum of Understanding. Program implementation, achievement of the related objectives, and compliance with the performance criteria will be the subject of half-yearly reviews. The authorities also stand ready to adopt, in consultation with IMF staff, any further financial or structural measures that may prove necessary for the success of the program.

Table I.1.

Burundi: Performance Criteria and Indicative Targets for 2008

(Fbu billion, unless otherwise indicated)

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Indicative targets.

The ceiling or the floor will be adjusted as indicated in the TMU.

Continuous performance criterion.

Table I.2.

Burundi: Performance Criteria and Indicative Targets for 2009

(Fbu billion, unless otherwise indicated)

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Indicative targets.

The ceiling or the floor will be adjusted as indicated in the TMU.

Continuous performance criterion.

Table I.3.

Burundi: Performance Criteria and Structural Benchmarks for 2009

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